Pearson Edexcel International Advanced Level Economics: Labour market failure (YEC11) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover 3.3.4 item 4 and 3.3.5 item 2 of the Pearson Edexcel International Advanced Level Economics specification (YEC11, Issue 2), Unit 3 Business behaviour. All countries, firms and figures are invented. Prepare with the study guide and revision notes. Course links: hub, checklist and free diagnostics.

Questions

1. Define geographical immobility of labour and state two causes. [3]

2. Country B closes its textile mills and 8,000 workers lose their jobs. Its labour force is 250,000, of whom 10,000 were already unemployed. The software sector has 3,000 vacancies, but only 450 of the displaced workers have the skills required.

(a) Assuming those 450 take jobs and nothing else changes, calculate the new unemployment rate. [3] (b) Explain why this situation shows occupational immobility and state one consequence. [3]

3. In Country C a worker in Town P earns 21,000 a year. The same job in City Q pays 27,000. Moving costs 7,200 once and housing in City Q costs 2,400 a year more.

(a) Calculate the payback period of moving. [3] (b) Give two reasons the worker may still stay. [2] (c) Suggest one government measure to raise geographical mobility and explain how it works. [2]

4. In a competitive labour market, demand is Qd = 150 - 10w and supply is Qs = 30 + 10w, where w is pay per hour and Q is in hundreds of workers.

(a) Work out where the market clears: the wage and the number employed. [2] (b) A legal floor of 8 per hour is set. Calculate how many are employed and how many are unemployed. [2] (c) Calculate the elasticity of demand for labour between the two wages and state what happens to the total wage bill. [4]

5. A firm is the only large employer in a town. Marginal revenue product is w = 14 - L and labour supply is w = 2 + L, where L is in hundreds of workers.

(a) Find the wage and employment the firm chooses, and the gap between pay and marginal revenue product. [4] (b) Find employment if a minimum wage of 7 is introduced. [2] (c) Find employment and unemployment if the minimum wage is 9. [2]

6. Explain one benefit and one drawback of a legal maximum wage in an occupation. [4]

7. Employer national insurance contributions rise from 10% to 14% of gross pay of 15.00 per hour. The elasticity of demand for labour is -0.8 and the firm employs 340 workers.

(a) Calculate the labour cost before and after, and the percentage rise. [3] (b) Estimate the new number employed. [2] (c) Explain one reason the actual fall may be smaller. [2]

8. A firm’s profit is 600,000. The corporation tax rate falls from 25% to 19%.

(a) Calculate the extra profit the firm keeps. [2] (b) Explain one way the cut could raise demand for labour and one reason it may not. [4]

9. A government trains 800 workers at 5,000 each. 65% complete the course and find jobs, earning 12,000 a year more. Each of them saves the state 3,500 a year in benefits, and the state taxes the extra earnings at 25%.

(a) Calculate the payback period for the government. [5] (b) Evaluate the scheme beyond this calculation. [3]

10. In Country D, mean hourly pay is 20.00 for men and 17.40 for women.

(a) Express the difference in pay as a percentage of the higher figure. [2] (b) Explain two measures to reduce discrimination. [2] (c) Evaluate the usefulness of these measures. [4]

11. Evaluate whether a minimum wage is the best way to reduce the exploitation of low-paid workers. [12]

Answers

1. Geographical immobility is the inability or unwillingness of workers to move to where jobs are [1]. Causes: high housing costs in job-rich areas [1]; family and community ties [1] (or removal costs, poor information). [3] Examiner insight: A definition that only says workers “do not move” is thin; name what stops the move and tie each cause to a barrier.

2. (a) Unemployed = 10,000 + 8,000 - 450 = 17,550 [1]. Rate = 17,550 / 250,000 x 100 [1] = 7.0% [1]. (b) Vacancies (2,550 unfilled) exist alongside 7,550 newly unemployed [1]. The problem is the skills fit, not a lack of jobs, so labour cannot move between occupations [1]. Consequence: structural unemployment and unfilled vacancies lower output and raise wage costs in the software sector [1]. [6] Examiner insight: Answers earn credit by using the numbers in the stem to show vacancies and unemployment together; generic statements about unemployment gain little.

3. (a) Pay gap = 27,000 - 21,000 = 6,000 [1]. Net gain = 6,000 - 2,400 = 3,600 [1]. Payback = 7,200 / 3,600 = 2.0 years [1]. (b) Family or school ties [1]; uncertainty over getting the job, or the higher cost of living [1]. (c) Subsidised or affordable housing in City Q [1], which cuts the extra annual cost and shortens the payback [1]. [7] Examiner insight: Show the net gain before dividing; dividing by the raw pay gap gives a figure that ignores housing and is a common slip.

4. (a) 150 - 10w = 30 + 10w [1], so w = 6, Q = 90 [1]. (b) Qd = 150 - 80 = 70 hundred employed [1]; Qs = 30 + 80 = 110, so unemployment = 40 hundred (4,000) [1]. (c) Wage change = 2/6 = 33.3% [1]. Employment change = -20/90 = -22.2% [1]. Elasticity = -22.2 / 33.3 = -0.67 [1]. Wage bill rises from 6 x 90 = 540 to 8 x 70 = 560, because demand is inelastic [1]. [8] Examiner insight: Take percentage changes from the starting values and keep the minus sign; linking the elasticity value to the wage bill shows you can use the figure, not just compute it.

5. (a) Marginal cost of labour = 2 + 2L [1]. MRP = MC: 14 - L = 2 + 2L, so L = 4 [1]. Wage from supply = 2 + 4 = 6 [1]. MRP at L = 4 is 10, so pay is 4 below MRP [1]. (b) At 7, supply L = 5 and demand L = 7 [1], so employment = 5 (up from 4) [1]. (c) At 9, demand L = 5 [1] and supply L = 7, so employment is 5 with 2 hundred unemployed [1]. [8] Examiner insight: Read the wage from the supply curve, not from the demand curve; the monopsony wage is the point students most often misplace.

6. Benefit: reduces inequality or excessive pay at the top [1], freeing funds for lower-paid workers or lowering costs [1]. Drawback: a cap below equilibrium creates a shortage of labour in that occupation [1], and skilled workers may emigrate or be paid in non-wage rewards [1]. [4] Examiner insight: Each point needs a reason, not a label; “causes a shortage” scores better when you say why the cap lies below the market wage.

7. (a) Before 15.00 x 1.10 = 16.50 [1]; after 15.00 x 1.14 = 17.10 [1]; rise = 0.60 / 16.50 = 3.6% [1]. (b) Employment change = -0.8 x 3.64 = -2.9% [1]; 340 x 0.971 = about 330 workers [1]. (c) Part of the tax may be passed on to workers through lower pay [1], so labour cost rises by less than 3.6% [1]. [7] Examiner insight: Carry unrounded figures through a multi-step calculation and round once at the end; state the assumption behind the elasticity.

8. (a) 25% of 600,000 = 150,000 and 19% = 114,000 [1]; extra kept = 36,000 [1]. (b) More retained profit can fund investment or expansion [1], which raises the demand for labour [1]. It may not, because the firm may pay it out as dividends [1] or there may be weak demand for its output [1]. [6] Examiner insight: A chain from tax cut to retained profit to investment to labour demand earns more credit than the statement “firms hire more”.

9. (a) Cost = 800 x 5,000 = 4.0 million [1]. Successful = 0.65 x 800 = 520 [1]. Fiscal gain per person = 3,500 + 0.25 x 12,000 = 6,500 [1]. Total = 520 x 6,500 = 3.38 million a year [1]. Payback = 4.0 / 3.38 = 1.18 years [1]. (b) 280 trainees do not gain, and some might have found work anyway (deadweight) [1]. Workers gain 6.24 million a year in higher earnings and skills may last [1]. The result depends on whether jobs exist and how long the gains persist, so the scheme is worthwhile only if the success rate holds [1]. [8] Examiner insight: Evaluation scores when it uses the scheme’s own numbers, such as the 280 who do not benefit, rather than general remarks.

10. (a) 20.00 - 17.40 = 2.60 [1]; 2.60 / 20.00 x 100 = 13.0% [1]. (b) Equal-pay and anti-discrimination law with penalties [1]; mandatory pay-gap reporting to expose differences [1]. (c) Laws can be hard to enforce and discrimination may be hidden [1]. Reporting adds compliance cost [1]. Part of the gap may reflect hours or experience, so the measures may not close it [1]. Overall they help when enforcement is strong and the gap is mostly unexplained [1]. [8] Examiner insight: A gap is a measurement, not proof of discrimination; answers that say so clearly show better judgement.

11. For: in a monopsony, a floor between the monopsony wage and MRP raises pay and employment [1], directly reducing exploitation [1]. It is simple to understand and cheap to run [1]. Against: in a competitive market, a floor above equilibrium reduces jobs [1], and if demand is elastic the wage bill falls [1]. Low-skilled and young workers may be hit hardest [1]. Other tools target the cause: limits on monopsony power, union recognition, training to raise mobility and productivity [1], though they cost more and take longer [1]. Exploitation may also arise from discrimination or immobility, which a floor does not remove [1]. The size of the floor relative to the market wage decides the outcome [1]. In the long run, firms may raise productivity or prices [1]. Judgement: a modest floor is a sound part of a package where one employer dominates, but it is not the best single tool where labour markets are competitive [1]. [12] Examiner insight: A judgement that names the deciding condition, such as the market structure or the size of the floor, reads as evaluation; a summary of earlier points does not.

Where marks are usually lost

• Predicting job losses from a minimum wage without checking the market structure.
• Reading the monopsony wage off the demand curve instead of the supply curve.
• Dividing by the raw pay gap and ignoring extra costs of moving.
• Using percentage changes from the wrong base.
• Confusing which curve a tax shifts.
• Saying “training helps” without cost, time lag or deadweight.
• Treating a pay gap as proof of discrimination.
• Concluding without a judgement.

Next steps

• Revisit the revision notes and the study guide.
• Check the Edexcel Economics hub and the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (YEC11), Issue 2, June 2018, first teaching September 2018: 3.3.4 item 4 and 3.3.5 item 2. Published by Pearson Education Limited.